2020/09/19

Stock market seems decoupled with economy: 5 reasons to explain.

Worldwide pandemic strike has later resulted asset market melt-down. The factories in China had labor shortages which reduced global supplies. After the COVID-19 punched American and European countries, the biggest shutdown or so called 'Great Lockdown' in world history, their demand has shrank extraordinarily enough to slow down international trade. The fear of loss of demand and supply would bring to the exacerbation of world economy and the stock responded accordingly. The coronavirus recession, which seemed like a bear market rally, has led to investor disposition effect. Margin calls negatively granted fear to investors to sell off their assets. 

However, the asset market such as stocks, bonds, and commodities, and so on started to revive while the fundamentals were still low. The media has attracted attention to the stock market in which mom-and-pop investors could have opportunity to buy the stocks cheaply from the lessons of dot-com bubble and great recession in 2008. The sensation so called 'FOMO (fear of missing out)' triggered melt-up markets. See my blog https://techongstudy.blogspot.com/2020/08/fomo-fear-of-missing-out.html

However, why does this phenomenon happen? What made the ‘fear of having asset’ to ‘fear of missing out’? Why are there so many day-traders (or sometimes called momentum traders) who think they can beat the stock market?

1. There is no alternatives (TINA)

The great shutdown has halted sports games to prevent people from mass gatherings. Sports association did not intend to cease but to sustain the games without crowds. However, as sports stars were exposed to the disease, the games were more than a month delayed. Quarantining at home as lockdowns continues, gamblers were seeking for attractive and thrilling bets. Dave Portnoy was at the lead, showing off his gains through selling and buying stocks. Robinhood investors were deceived by ‘mister market’ (which Benjamin Graham introduced) and started their speculative activities. The liquidity from sports gamble to the stock market has moved the index upwards. 


2. Signals for economic recovery

Crowds believed that the worst has passed. As stock market index is a leading indicator to the economy, multitudes assumed in a strong bounce back. More positive news on real economy such as PMI or unemployment rates are alluring mom-and-pop investors to the market. Anticipation on corporate earnings recuperation can be a strong reason for holding the shares in case of rising in the future. “If the economy continues its recovery and real GDP growth is anywhere close to the current consensus view, the stock-market bull may just be getting warmed up”, says Jim Paulsen, chief investment strategist at Leuthold (WSJ). 

3. Monetary Policy

Federal Reserve and U.S Treasury have been responding to the pandemic crises more rapidly than the previous catastrophes such as financial crisis in 2008 or great depression in 1929. Fed has cut its federal funds rate to near-zero and reported its lending powers by financing into special purpose vehicle (SPV) leading market reflation. Low interest rate is good for ‘gold-and-silver class’ wealthy people since they borrow money at discounted price and invest on asset markets to seek for more wealth. According to the Federal Reserve about top 10% of wealthy Americans owned 87% of all stock in the first quarter. Also, the banks seem to lend cash in accordance with reliability and ability to pay back. Moreover, low interest rate results in low real yield of treasury bills, notes, and bonds (regarding inflation), which would boost asset market such as stocks and gold to benefit more gains. See my blog: 

https://techongstudy.blogspot.com/2020/09/real-yield-is-reason-for-market-mover.html. 

However, this does not only apply to Fed but also to Bank of Japan, European Central Bank, and the banks all over the world. BOJ and ECB both revealed to give incentives to the commercial banks whenever their lending activities to the firms outperforms. Programs such as SLF, PEPP, TLTRO III were announced to bring the stability of their asset market.


4. Fiscal Policy

U.S. Department of Treasury has announced fiscal policy, CARES Act, which “provides fast and direct economic assistance for American workers and families, small businesses, and preserves jobs for American industries.” This includes PMCCF or SMCCF, MNLF, etc. Companies such as YRC, MCH, and Juniata received bailouts of loans from government. Lending programs such as 150 million stimulus package and payroll protection program were also revealed by U.S. Treasury, helping for firms to maintain employments or furloughed ones. HEALS (Health, Economic Assistance, Liability Protection and Schools) Act was additionally mentioned. These are later having ‘announcement effect’, which means Fed's bond-buying program (CCF) has affected investors’ psychology to buy the assets believing lending program will help them buying later according to New York Fed’s report ‘It’s What You Say and What You Buy : A Holistic Evaluation of the Corporate Credit Facilities’. “The effect of the programmes is more psychological than financial... The Fed has totally achieved their target.” 

5. Dominance of Tech Giants

The out-performance of the tech giants laid the disparity between the stock market winners and losers. The gap between them has resulted inequality in the market; companies which concentrate on contactless business such as Paypal, Shopify or Zoom had best performances during the pandemic since many people were staying at home. However, energy, financials, utilities, real-estate and industrial segments were still in the red. Most of tech giants have market capital dominance, which makes stock markets such as Nasdaq and S&P 500 moving upwards since the index is calculated in weighting method, giving a higher percentage allocation to companies with the largest market capitalization. Big market capitalization is dominated by companies with contactless business tools which makes stock market inflated.



Source

https://www.visualcapitalist.com/how-big-tech-makes-their-billions-2020/

https://research.stlouisfed.org/publications/economic-synopses/2020/04/21/central-bank-responses-to-covid-19

https://www.wsj.com/articles/why-did-stock-markets-rebound-from-covid-in-record-time-here-are-five-reasons-11600182704

https://www.wsj.com/articles/should-you-buy-stocks-because-interest-rates-are-low-11600263713

https://www.wsj.com/articles/when-the-stock-market-and-economy-seem-disconnected-11598002220

https://www.wsj.com/articles/this-market-is-a-tech-market-if-bond-yields-rise-watch-out-11598101689

https://www.marketwatch.com/story/robert-shiller-explains-the-pandemic-stock-market-and-why-its-decoupled-from-the-economy-2020-07-07

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